The Election Matters....Or Does It?

President-elect Barack Obama with 52 percent of the popular vote and the Congress with an approval rating of 18 percent (according to Gallup) are entering the extreme sport of nursing the U.S. economy back to health while attempting to please their constituents. The good news? They now have four years (or two for representatives) to forget about reelection and fully address today's problems by focusing on solutions rather than election rhetoric. The bad news? That sort of attitude does not come naturally to a successful politician.

The people have spoken by not only electing the most liberal member of the Senate (according to The National Journal ) as President, but by boosting the power of the Democratic Party in the Congress whose approval rating had been foundering near all-time record lows for over 6 months. Why choose to go this route? Obviously, because the alternative looked worse. Now it is up to the Democrats to follow through with their campaign promises. There is no reason to move to the middle of the road here. By instituting the economic and social policies promised, they will only be doing the bidding of the electorate.

As an investment manager and bond market participant for over 15 years, I have a political confession to make: I've never paid much attention to politicians. Oh, on the social side and even on the microeconomic level they certainly make a difference in our lives as individuals. But when it comes to gauging where the macro-economy will turn next, I've come to learn there is a governor on our governors in the form of an independent central bank.

The modern Federal Reserve has operated fully independent of the political process, save for a biannual grilling at the hand of Congress or a woodshed meeting at the White House. And it's a good thing, too.

Just imagine if every time we got a new president or ruling party in the Congress or Senate, there was some direct effect on how the Fed institutes monetary policy. This would have meant a new power shift 11 times since 1980 versus having only three Fed chairmen under our current independent Fed during that time period. Clearly, the stability and credibility of the Fed would be diminished under such a system.

Economic theories differ from school to school, but the one thing they have in common is that time must be a factor. In no economic school of thought is there an "automatic" fix to any challenge faced.

Given time as an important ingredient to any economic maneuvering, this stability at the helm is vital. Without it, we could not fully commit to any path and the economy would be left to the whims of the voting constituency. Almost every governmental policy decision can be easily reversed through the wave of a pen, but not so with economic policy.

If an administration's efforts provide too much stimulus to the economy, the Fed can pull on the reins a bit by adjusting the appropriate tool (money supply, interest rates, required reserves, etc.) to a more restrictive posture than they normally would. The opposite holds true as well, which is why a Federal Reserve that manages itself independent of the political process is so important.

Discussions will heat up over the coming months with regard to restructuring Fannie and Freddie to achieve their goal of promoting homeownership, while restricting the opportunity for past sins to arise. One thought has been to place them under the purview of the Fed as the Fed has a solid history as a strict regulator.

This could lead to disaster if at the same time the Fannie/Freddie twins are allowed to lobby once again. After all, their lobbying efforts grew to legendary proportions during the build up to the bust. Should the Fed have to answer to Congress or the White House for its every effort to govern the twins, we will be well down the road to adding too much political maneuvering to the management of our economy.

We can't have a "What have you done for me lately?" attitude toward the Fed. The mob mentality that occurs when there are no immediate results will effectively paralyze our ability to navigate the ups and downs of the economy. From this perspective, politicizing the Fed in any way is a road to ruin.